Economic Business Cycles

successive periods of economic fluctuation

The two periods

contraction and expansion

The two turning points

trough and peak

The 4 phases

Recovery

Prosperity
Recession
Depression

identify recovery

• It begins immediately after a trough. 

• It is measured from the trough to the trend line

Identify Recession

• It begins immediately after the prosperity phase. 

• It is measured from the peak to the trendline.

Traits of prosperity within the economy

• Levels of investment, production and spending remain high

• Interest rates may also begin to rise. 

• Supply shortages can lead to inflation.

• Employment levels continue to rise

Traits of a recession

• Household income decreases along with household spending. 

• Real GDP beings to fall.

Traits of depression

• It is measured from the trendline to the trough. 

• Economic sentiment becomes more pessimistic. 

• Levels of unemployment increase and consumer spending decrease sharply. 

• Authorities may decrease interest rates to help stimulate economic activity.

Business cycles give us info on…

• The strength of the forces causing fluctuations in economic activity.

• The general direction of economic activity.

The amplitude indicates…

the strength of underlying forces that drive changes in economic activity.

extrapolation

economic forecasting

Economic indicator

A value that is used to give information about the current performance of the economy or to predict economic performance.

leading indicators

• Share prices

• Gold ore milled

• Number of new cars sold

Coincident indicators

• Real GDP (excluding agriculture)

• Real retail sales values

• Registered unemployment

If lagging indicators diverge from coincident indicators, the predicted economic change may be weak or short-lived.

• Hours worked in construction

• Unit labour costs in manufacturing

• Number of commercial vehicles sold

A composite indicator

a single value created by combining several indicators of the same type.

The two methods of economic forecasting

Quantitative methods involve the use of statistics and historical time series data to predict the future of the economy.

Qualitative methods (or judgmental methods) involve the use of judgement, expert opinions, market research and estimates to predict the future of the economy.

The exogenous explanation of business cycles

the monetarist view

factors that impact the market from outside the system.

What is the monetarist argument

Economic growth depends on expanding natural and technological resources for production.

The forces of supply and demand and price adjustments will naturally bring the economy back into equilibrium when imbalances occur

The exogenous causes of business cycles

Changes in primary sector output -Weather conditions

Structural changes

money supply changes affect price levels and impacts output and levels of employment

unexpected shocks

The endogenous explanation of business cycles

• Economic activity will either be below or above the potential economic growth path because of the unstable nature of market economies.

• Prices are not effective in regulating the supply and demand of the factors of production and goods and services.

The endogenous causes of business cycles

monetary causes

Enterpreneur motive

alternating investments

Changes in aggregate demand and supply

Types of economic cycles.

Kitchin cycle-3 to 5 years

juglar cycle-7to 11 years

kuznets cycle-15 to 20 years

kondratieff cycle-50+ years